What’s the going rate for buildout hard cost carry during construction in 2027

The Base Rate Market

The going rate for hard cost carry is driven by the prevailing interest rate environment, which in recent years has seen elevated rates compared to the prior decade. Commercial construction loans typically price at a benchmark rate plus a spread that reflects the borrower's creditworthiness and project risk. If you're drawing on a business line of credit instead of a dedicated construction loan, expect a rate tied to prime plus a margin. The rate you actually pay depends on your creditworthiness, the loan-to-cost ratio, and whether the lender sees the project as speculative (higher risk) or pre-leased (lower risk). For a credit tenant with a strong balance sheet, a landlord can often secure institutional debt at favorable terms, passing those savings to you in the rent. But if you're a small business or a startup, you're likely looking at higher rates on a short-term facility. The single best move: get three lender quotes and ask for a rate lock during the construction period — floating rates can add significant cost if the benchmark moves.

How Draw Schedules Affect Your Carry

The hard cost carry is not a flat number — it's a function of when the money comes out. A typical draw schedule releases funds in tranches tied to milestones: mobilization, rough-in, drywall, finishes, and completion. If you draw the full amount on day one, you pay interest on the entire sum for the whole duration — that's the worst-case scenario and can significantly increase your carry. Smart operators negotiate a just-in-time draw schedule where funds are released only as subcontractors need them, keeping the average outstanding balance lower than the total. For a typical buildout over several months at a given annual rate, a lump-sum draw costs substantially more in carry, while a phased draw cuts that cost considerably. Also watch for retainage — lenders often hold back a portion of each draw until final completion, which reduces your carry but also ties up cash. The general contractor's billing cycle (monthly vs. biweekly) also matters: faster billing means faster draws and less interest.

Soft Cost Carry vs. Hard Cost Carry

Hard cost carry covers the physical construction — materials, labor, equipment — but soft cost carry is the silent killer. Soft costs include architectural fees, engineering, permits, legal fees, insurance, and financing costs themselves. Soft costs typically run a meaningful percentage of total project costs, and they're often paid upfront before construction even starts. That means you're carrying interest on those soft costs for the entire construction period, even though they're not tied to physical progress. The fix: negotiate deferred payment terms with your architect and consultants, or roll soft costs into the draw schedule so they're reimbursed as the project progresses. Some lenders offer soft cost lines that allow you to draw only as invoices come due, reducing your average balance. Never lump soft costs into your hard cost loan without a separate amortization schedule — it's a common mistake that inflates your effective rate.

The Landlord vs. Tenant Carry Split

In a build-to-suit lease, the landlord typically funds the buildout and recovers the cost through higher rent over the lease term. That means the hard cost carry is baked into the landlord's pro forma — they borrow the money, pay the interest, and amortize it into your base rent. But if you're a tenant topping up the TI allowance (say, the landlord gives a certain amount per square foot but your buildout costs more), you're on the hook for the gap, and you'll pay carry on that gap. The critical negotiation point: when does the rent start? If your lease says rent begins at substantial completion, but the buildout takes longer than expected, you're not paying rent *and* you're paying carry — double hit. Smart tenants push for a rent abatement period that covers the construction timeline, so carry is offset by zero rent. Also, ask the landlord to capitalize the carry into the TI allowance — meaning they increase the allowance by the estimated interest cost, so you don't have to pay it out of pocket.

How to Calculate Your Actual Carry

Here's the formula for hard cost carry: Average Outstanding Balance × Annual Interest Rate × (Construction Duration in Months / 12). For a buildout with a phased draw that keeps the average balance lower than the total, the carry is proportionally less than if you drew the full amount on day one. To estimate your average balance, consider the draw schedule and when major costs are paid. Add soft cost carry separately: estimate soft costs as a percentage of hard costs, assume they're paid upfront, and multiply by the full duration. Always run this math before signing any loan or lease, and ask your lender for a carry estimate in writing.

Negotiation Strategies to Minimize Carry

You can reduce your hard cost carry significantly with the right moves. First, negotiate a longer interest-only period on your construction loan — most lenders offer a standard period, but you can push for more if the project is complex. Second, accelerate the draw schedule by paying subcontractors on faster terms — faster billing means faster draws and less interest accrual. Third, use a credit card for small early-stage costs (permits, deposits) if you have a 0% introductory APR — that's free carry for a period. Fourth, push for a tenant improvement allowance that covers 100% of hard costs, so the landlord bears the carry. Fifth, build a contingency fund into your budget to avoid change orders that extend the timeline — every extra week of construction adds carry. Finally, lock your rate with a forward rate agreement if you're worried about benchmark hikes — it costs a small percentage of the loan amount but protects against a significant rate spike.

How Hard Cost Carry Is Typically Structured in Lease Negotiations

Hard cost carry is rarely a standalone line item in a lease. Instead, it is embedded within the tenant improvement (TI) allowance or structured as a separate landlord contribution that accrues during construction. Landlords commonly offer a TI allowance that includes a “carry” component, meaning the landlord funds the hard costs upfront and recoups that capital over the lease term through amortization. The rate of carry is effectively the landlord’s cost of capital (often tied to their blended borrowing rate) plus a small administrative margin. Tenants should negotiate for the carry to be calculated using a simple interest method rather than compounding, as compounding can significantly inflate the total repayment amount. Additionally, the carry period typically runs from the date the first hard cost draw is made until the certificate of occupancy or substantial completion—whichever comes first. Any delays caused by the landlord or general contractor should pause the carry clock.

Why Hard Cost Carry Rates Vary by Market and Asset Class

The rate for buildout hard cost carry is not uniform across all commercial real estate. It varies considerably based on location, property type, and the landlord’s financing structure. For example, in high-demand urban office markets, landlords may offer more favorable carry terms (lower rates or shorter periods) as a competitive incentive to attract creditworthy tenants. Conversely, in secondary markets or for specialty uses like medical or lab space, landlords may charge higher carry rates to offset perceived risk and longer construction timelines. The asset class also matters: industrial and warehouse buildouts typically have shorter construction periods and lower hard costs, so carry rates may be lower. Retail and restaurant buildouts, which often require extensive MEP (mechanical, electrical, plumbing) work and landlord coordination, can see higher carry rates due to the complexity and longer duration. Tenants should benchmark their specific market and property type by reviewing recent lease abstracts from comparable properties.

Practical Strategies to Minimize Hard Cost Carry Exposure

Tenants can take several proactive steps to reduce or eliminate hard cost carry charges. First, negotiate a “carry-free period” at the start of construction to cover mobilization and initial work before carry begins accruing. Second, request that carry only apply to the outstanding balance of hard costs, not the entire TI allowance, and that it be calculated on a monthly simple interest basis rather than daily compounding. Third, structure the TI allowance as a lump sum disbursed at project milestones rather than a revolving draw—this limits the principal on which carry is calculated. Fourth, include a clause that any carry charges are waived if construction delays are caused by the landlord’s failure to deliver the space in a “vanilla box” condition or by permitting issues outside the tenant’s control. Finally, consider a “turnkey” buildout where the landlord absorbs all hard costs and carry in exchange for a higher base rent—this eliminates carry risk entirely and simplifies budgeting.

How to Calculate Hard Cost Carry for Your Buildout

To estimate your hard cost carry, use a simple formula: (Total Hard Costs ÷ 2) × Annual Interest Rate × (Construction Duration in Months ÷ 12). The division by two accounts for the typical draw schedule where funds are spent gradually, not all at once on day one. Adjust the duration upward for any anticipated delays—a common oversight that can add significant cost to your carry.

Negotiating Who Bears the Carry

The allocation of hard cost carry is often a point of negotiation between tenant and landlord. If the landlord provides a tenant improvement allowance, they typically absorb the carry during construction. However, if you're funding a portion yourself or topping up the allowance, that share is your responsibility. Landlords may also offer a "rent commencement date" that starts after construction finishes, shifting the carry burden. Always clarify in your lease whether the landlord's allowance includes a carry budget, or if you'll need to cover it separately—this can significantly impact your total project cost.

Avoiding Common Pitfalls with Draw Schedules

The timing of fund draws directly affects your carry. A poorly phased draw schedule—where you borrow large sums early but spend them slowly—inflates your average outstanding balance and thus your carry. Work with your contractor to align draws with actual spending milestones (e.g., 20% at foundation, 40% at framing, 30% at finishing, 10% at closeout). Also, include a contingency draw for unforeseen issues; without it, delays can force you to carry idle funds longer. A well-structured draw schedule can reduce your effective carry significantly compared to a lump-sum approach.

FAQ

What is hard cost carry in a buildout? It's the interest you pay on borrowed money while the construction is happening — the cost of "carrying" that debt until the space is finished and generating revenue.

Does the landlord always pay the carry? No — only if the landlord funds the entire buildout via a TI allowance. If you're topping up the allowance or paying for extras, you're responsible for the carry on your portion.

How do I estimate my carry before signing? Use the formula: average outstanding balance × annual interest rate × (construction months / 12). Ask your lender for a detailed draw schedule and rate quote.

Can I deduct hard cost carry on my taxes? Yes — interest on construction loans is generally tax-deductible as a business expense, but it must be capitalized as part of the building's cost basis if the project is a capital improvement.

What happens if construction runs over schedule? Your carry increases because you're paying interest for more months. Build a buffer into your timeline and negotiate a grace period with your lender.

Is hard cost carry the same as soft cost carry? No — hard cost carry is interest on physical construction costs (materials, labor), while soft cost carry is interest on pre-construction expenses (architect, permits). Soft costs are often paid upfront, so they carry for the full duration.

Sources

• U.S. Federal Reserve — prime rate and SOFR benchmarks
• Construction Financial Management Association — industry draw schedule best practices
• National Association of Realtors — commercial real estate financing trends
• Building Owners and Managers Association (BOMA) — tenant improvement standards
• Real Estate Finance and Investment — textbook on construction loan mechanics
• International Code Council — permitting timelines affecting carry
• The Wall Street Journal — interest rate coverage and commercial real estate

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